MULTIPLE CHOICE
1.Identify the TRUE statement regarding capital structure.
a.it is measured by the price-earnings ratio
b.most firms in a given industry will have approximately the same capital structure
c.can affect shareholders’ returns on their investments
d.the more capital structure a company has the greater is its efficiency
2.A firm's capital structure affects a company’s
a.default risk but not return on equity
b.return on equity but not default risk
c.default risk and return on equity
d.neither default risk nor return on equity
3.Which of the following must be used when analyzing the capital structure of a firm?
a.long-term assets
b.liabilities
c.current assets
d.expenses
4.Which of the following does NOT affect the capital structure of a company?
a.accounts payable
b.cash
c.bonds payable
d.paid-in capital
5.Which of the following ratios is NOT a measure of capital structure?
a.debt to equity
b.return on equity
c.debt to assets
d.assets to sales
6.The use of debt to increase a company's return on equity
a.is known as financial leverage
b.will always improve a company’s financial leverage
c.measured by the debt to equity ratio
d.is less risky than selling additional stock
7.Which of the following statements about financial leverage is FALSE?
a.financial leverage is beneficial to stockholders when a company performs well
b.financial leverage is beneficial to stockholders when a company performs poorly
c.financial leverage works against stockholders when a company performs poorly
d.the use of financial leverage magnifies a firm's return on assets
8.If an investor (stockholder) discovers by analyzing financial statements that she "lost 5 cents for each dollar she had invested in the company," which ratio did she examine?
a.debt to equity
b.debt to assets
c.return on equity
d.financial leverage
9.The use of financial leverage always has which of the following effects on a company's financial statements?
a.increased revenue
b.increased assets
c.increased stockholders' equity
d.increased liabilities
10.Financial leverage will result in a(n)
a.increase in liquidity
b.increase in return on equity
c.decrease in risk
d.more volatile return on equity